On the receiving end of an unsolicited offer? React prudently

Jonathan Ives has been with Fifth Third Investment Banking since 2011, providing advice regarding financing strategies and mergers and acquisitions. He has more than 15 years of investment banking experience working with middle market and large corporate growth companies.

If you are like many privately held business owners, you regularly receive calls from people interested in buying your company. Many of these calls are from brokers or investment banks trying to generate new leads. Others are from private equity firms that are “testing the waters” to see if they get a response and that may or may not have real interest after reviewing the operations or financial results. Occasionally, however, serious interest from legitimate buyers or even an expression of interest or letter of intent can find its way into your hands even though you haven't put your company on the market.There are several factors driving strategic and private equity buyers to make unsolicited offers. It is reported that approximately $2 trillion of cash sits on the balance sheets of U.S. corporations, and balance sheets are at very healthy levels. During the severe downturn of 2008, corporations cut costs and since the recovery have operated with greater efficiency. This has allowed for margin expansion, record operating cash flows, and significant debt reduction. At the same time, interest rates remain at record lows, banks and finance companies are aggressive, and capital markets are favorable for acquisition financing. These factors, combined with slowing revenue growth opportunities, have led many corporate buyers to actively seek acquisition targets that fit their strategic criteria.

In addition, private equity firms have several hundred billion dollars of equity on the sideline. Their investors are applying intense pressure to put equity to work in high quality transactions. Many private equity firms have a strategy of contacting entrepreneur-owned businesses that aren't “for sale” to generate proprietary deal flow and avoid an auction process.Reacting to unsolicited buyer interestWhen buyer interest is being evaluated, it will be important to know your objectives. What do you want to accomplish for yourself, management, employees and other stakeholders? How important are speed, valuation and certainty in determining your response?In addition to your objectives, market timing can influence if now is the right time for a sale transaction. Future financial performance of the business as well as industry and capital market conditions should be evaluated. Would value to a potential buyer be likely to increase or decrease for your business if a transaction is delayed by months, quarters or years?What to do when the offer is received

If interest from a potential buyer seems legitimate, it will be important to get specific details in writing beyond just a purchase price. The total purchase price can take various forms including cash at closing, seller financing, equity reinvestment, earnouts, and stock of the buyer's company. Additional important specifics include the transaction timetable, approvals the buyer will need from key decision makers, financing and financial wherewithal, and due diligence requirements.An investment banker should be consulted when evaluating an inbound offer. These professionals can assist with one-on-one negotiations or advise whether approaching other buyers in a broader process would make sense. Even if the decision is made not to approach multiple buyers, investment bankers create the perception of competitive tension and availability of seller alternatives. Investment bankers understand the valuation approaches used by buyers and can help management build financial projections to support a stronger valuation. If, after initial negotiations, you plan to move forward with an inbound offer, it will be important to consult a team of additional professionals. Your attorney, accountant and wealth planner can provide valuable perspectives and help avoid pitfalls and surprises later in the process. In particular, an attorney can provide guidance on what is customary and what is unusual in negotiations. An accounting firm can analyze the tax implications of transaction structure and supplement your internal staff during due diligence when timely delivery of information is critical. A wealth management adviser can create a plan for investing the transaction proceeds.Market conditions continue to be attractive for owners of privately held businesses to consider a sale. If an inbound offer is received that is credible, consider your personal and professional objectives when evaluating a transaction, and know your network of advisors will be invaluable as you move through the process of closing the sale.Editor's note: Fifth Third Securities is the trade name used by Fifth Third Securities Inc., member FINRA/SIPC, a registered broker-dealer and a registered investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Securities and investments offered through Fifth Third Securities Inc. and insurance products: are not FDIC-insured, offer no bank guarantee, may lose value, are not insured by any federal government agency, are not a deposit. Contents are provided for informational purposes only and do not constitute a solicitation of services provided.

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